Dollar pares loss after FOMC minutes

Direction of stocks, riskier assets driving the greenback

By

DeborahLevine

WilliamL. Watts

NEW YORK (MarketWatch) — The U.S. dollar pared losses against other major currencies Wednesday, after minutes of the Federal Open Market Committee’s April meeting showed that officials were divided on when to begin tightening monetary policy, with some concerned that tighter policy could dampen the economic recovery.

Analysts said the minutes showed officials favored letting the Fed’s balance sheet shrink a little as assets, which it has bought during its two rounds of quantitative easing, mature. That would be followed by raising interest rates and actively selling some of its assets after that. Read more on Fed minutes.

“The Fed also said that discussions of an appropriate exit strategy does not mean that they are looking to implement one soon,” said Kathy Lien, director of currency research for GFT. “At the end of the day, the Federal Reserve is still on hold and nothing has changed that fact.”

Stocks kept pressure on the greenback as investors reconsidered the need for the relative safe-haven status granted to the greenback. Read more about U.S. stocks.

The U.S. dollar index
DXY, +0.38%
which measures the greenback against a basket of six global currencies, traded at 75.438, down marginally from 75.441 late Tuesday in North America.

The euro
EURUSD, -0.0339%
traded at $1.4233, recovering after falling to $1.4193 and up slightly from $1.4219 Tuesday.

The dollar had been in positive territory in U.S. morning trading, with the British pound weakening after minutes from a recent policy meeting were released and as European officials brought Greece’s sovereign-debt problems back into the spotlight.

Earlier, the euro was weaker as European Central Bank officials sought to play down prospects for a restructuring of Greek sovereign debt after Jean-Claude Juncker, who chairs the group of euro-zone finance ministers, said Tuesday that a “soft restructuring” could be considered if Greece undertakes more fiscal measures. Read about Juncker’s comments on Greece.

In a speech in Milan, Lorenzo Bini Smaghi, a member of the central bank’s executive board, reiterated his opposition to a restructuring, arguing that such a move could devastate Greek banks, according to Dow Jones Newswires.

And ECB Vice President Vitor Constancio, in a panel discussion in Brussels, said restructuring should only be a “last resort,” Dow Jones reported.

Analysts at KBC Bank in Brussels said Greece and that the sovereign-debt problems remain a concern but that global risk sentiment would likely be the main driver for Wednesday’s trading in the euro against the dollar.

They contended the euro is set for further gains after hitting a correction low of $1.4048 Monday.

“From there, the pair is trying to establish a pattern of higher highs and higher lows,” they wrote. “The picture is still fragile, but this suggests that a bottoming-out process might be developing. We reinstall a cautious buy-on-dips strategy.”

Conversely, the euro dropping below the $1.40 mark “would be an indication that the bottoming process has failed,” the KBC analysts said.

Bank of England

Also Wednesday, the British pound
GBPUSD, -0.0074%
weakened after the minutes of the Bank of England’s May 5 policy meeting were released. Sterling traded at $1.6149, down from $1.6246 Tuesday.

According to the summary, Bank of England policy makers again split 6-3 in favor of holding the key rate unchanged at 0.5%, with Spencer Dale and Martin Weale calling for a quarter-point rate hike and Andrew Sentance repeating a call for a half-point tightening. Sentance is due to step down from the Bank of England’s policy panel at the end of the month.

The minutes also showed Dale and Weale regarded the matter as “finely balanced,” amid uncertainty over the economy’s strength.

“So even the hawks are turning more cautious,” said Chris Walker, currency strategist at UBS. “That is extremely important.”

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